Automakers Seek Bailout to Reward 40 Years of Bad Decisions

by: Keith Fitz-Gerald

I don’t know about you, but I could only pick my mouth up off the floor when I watched the Big Three’s CEOs beg for a taxpayer-funded bailout this week. Never mind the fact that they’re now asking for $34 billion (up 36% from $25 billion two weeks ago), or that they drove to DC in a caravan of new hybrids that would make the Keystone Cops proud.

What got my attention was that Ford’s (NYSE:F) CEO Alan Mulally, after admitting "big mistakes," attempted to sway Congressional members by saying "we’re really focused now."

Perhaps I’m not the brightest bulb in the bunch here, but it seems to me that’s what the Big Three said in the 70s when Japanese cars invaded in earnest; that’s what they said in the 80s when quality suffered; and that’s what they pitched in the 90s with SUVs and trucks. Yet their market share has dropped from more than 70% to less than 50% today.

They’re so "focused" I can’t stand it. And I can only wonder what they’ll say when Chinese automakers hit our shores in the next few years at retail prices that are 30% less than Detroit’s production costs.
Even at $1 a year, these guys are overpaid in my book - but I digress.

The so-called Big Three are nowhere near the anchor of American industry that Detroit would have us believe. And the arguments they’re using are superficial at best. Maybe that’s good enough to bamboozle some people, but I like to think the American public is smarter than that.

Essentially what they’re saying boils down to this…that the Big Three - GM, Ford, and Chrysler - contribute billions of dollars to the purchasing chain. Allowing them to go out of business would disrupt this chain, and somehow affect 3 million jobs.

It might, but chances are, not for the reasons they’ve laid out.

The Big Three are manufacturers. They do not exist to purchase things. They exist to make and sell them. And their success or failure is based uniquely on how well they meet the needs of consumers who buy their products which, of course, leads directly to how much market share they have. Or not.

It’s Elementary Economics, Dear Automakers.

That brings up the notion of basic supply and demand. If you recall high school Economics 101, supply is the total amount of goods and services (in this case cars) available for purchase. Demand is the amount of a particular good or services that a consumer or consumers will want to purchase at a given price.

Demand curves are normally downward sloping because consumers typically buy less as price gets higher. Similarly, supply curves are upward sloping because there is typically less consumption at higher prices, which means more supply remains unpurchased.

In their rush to portray their industry as the lynchpin to supply as well as the victim of foul economic conditions, they’re forgetting that their failure will not bring about the total destruction of demand. History is literally littered with failed companies. Demand will no more fall off because the Big Three fail than people will stop buying beer if Budweiser goes under.

What’s far more likely to happen is that Honda (NYSE:HMC), Toyota (NYSE:TM), Tata (NYSE:TTM), Mercedes, BMW, Chery, Geely and other companies will fill the void. Chances are that not only will these companies absorb key elements of the purchasing chain, but the workers, too. History shows that industry consolidation is actually a positive influence for the remaining companies and their workers. History also demonstrates that during periods of industry consolidation there really isn’t anything other than short-term loss in business activity. Other firms will move in… if there’s demand.

Bottom line, what Detroit’s really after is a bailout that will preserve the status quo and implicitly reward 40 years of inept management, bad decisions and poor quality. It simply doesn’t make sense to throw $34 billion at businesses that are losing $6 billion a month.

Like the other Federal bailouts (which I, as a proponent of the Austrian school of economics and free markets, think are fundamentally wrong), a taxpayer-funded bailout would do nothing to increase Detroit’s competitive position. Instead, a funded bailout would serve as a sort of punitive tax on successful companies like Toyota and Honda, just to name two of the most obvious. It would also allow Detroit to come back for more money after they blow through anything given to them now.

There are still plenty of strong automobile companies operating in the U.S. making a slew of products ranging from ultra-plain utilitarian models to large-scale trucks and all sorts of luxury vehicles in between. And more will probably come here if they fail.

So here’s to the natural order of things and, hopefully, a levelheaded Congress that will let the markets take their natural course and force a shakeout…not a bailout.

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